Alphamin Resources (CVE:AFM) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Alphamin Resources Corp. (CVE:AFM) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Alphamin Resources

What Is Alphamin Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Alphamin Resources had US$4.08m of debt in September 2022, down from US$34.8m, one year before. But on the other hand it also has US$119.9m in cash, leading to a US$115.8m net cash position.

A Look At Alphamin Resources' Liabilities

According to the last reported balance sheet, Alphamin Resources had liabilities of US$74.2m due within 12 months, and liabilities of US$27.0m due beyond 12 months. Offsetting these obligations, it had cash of US$119.9m as well as receivables valued at US$30.2m due within 12 months. So it can boast US$49.0m more liquid assets than total liabilities.

This surplus suggests that Alphamin Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Alphamin Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Alphamin Resources grew its EBIT by 111% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alphamin Resources can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Alphamin Resources has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Alphamin Resources recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alphamin Resources has US$115.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 111% year-on-year EBIT growth. So we don't think Alphamin Resources's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Alphamin Resources that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.